Google


Google’s Liability Decade: Why Google’s Leadership Ducks Investors

April 30, 2010 | Filed Under Business, Capitalism, Computers, Economy/Finances, Free Trade, Google, Inernet, Net Neutrality, Scott Cleland, Technology | Comments Off

-By Scott Cleland

The abrupt change, that Google’s CEO Eric Schmidt will no longer be accountable to shareholders on Google’s earnings calls, should prompt investors to ask why?

Google claimed that they wanted to put more focus on Google’s strong financials, but they did not disclose any more than Google’s usual barest minimum of information to investors. The most obvious reason for this abrupt change is the literal explosion of real franchise liabilities and risk overhangs to Google that reared their ugly heads this past quarter. Had CEO Schmidt been available to answer investor questions, Google’s exploding liabilities could have dominated the Q&A and the investment narrative coming out of the earnings call.

What has changed, and what Google has been not been open about, is the very serious ripening of three different types of going-forward franchise risks (antitrust, privacy/security and intellectual property) that cumulatively herald a de facto change in Google eras: from the roaring “Growth Decade” of 2000-2009, to the more unpredictable “Liability Decade” of 2010- 2019.

Long-postponed simmering problems are now beginning to boil over and threaten to potentially burn Google shareholders periodically going forward. The result for opportunistic Google investors is recurring and intensifying headline risk overhang and longer-term Google investors is the increasing need to discount for the growing and uncertain franchise liabilities/risks emerging from multiple directions.

What franchise liabilities now overhang Google?

I. Antitrust

The speed, breadth and depth of Google’s growing antitrust liability is unprecedented. And where there is this much smoke, there’s fire.

FTC: The FTC is preparing to litigate to block Google’s acquisition of AdMob arguing that Google, the #2 mobile app advertiser with 25% share, is attempting to monopolize over 70% of the relevant market by buying #1 AdMob, which has 50% share.

If Google chooses to fight the U.S. Government in court it would put Google’s antitrust liabilities on the front page and also cause the FTC, DOJ and the EU to circle Government wagons for a broader antitrust war with Google.

If Google walks away, it suggests to investors that Google has acquiesced to the notion that Google has hit an antitrust wall and that Google may no longer rely on acquisitions as a source for: preemptive competitive defense against first-movers, growth or innovation.

The FTC appears to be making good on its promise in approving Google-DoubleClick 4-1:

“We want to be clear, however, that we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly.”

On a separate but related antitrust matter, the FTC has forced Google CEO Eric Schmidt to resign from Apple’s board and Google Director John Doerr to resign from Amazon’s board.

DOJ: According to Sandy Litvack, the DOJ’s special counsel on the Google-Yahoo ad agreement, the DOJ was literally hours away from filing a Sherman Section 1 & 2 monopolization case against Google if it did not stop attempting to collude with Yahoo to corner the search advertising and search advertising syndication markets.

The DOJ has now twice opposed (here and here) Google’s proposed book settlement as a violation of three different areas of law: antitrust, copyright and class action. The most likely outcomes are that Google agrees to a court decree with permanent DOJ supervision of the settlement’s market mechanism in order to gain court approval, or that the settlement is disapproved and DOJ eventually sues in a broader Google monopolization case.

Evidence of the building clamor in D.C. for a DOJ Section 1 & 2 monopolization case against Google is a Consumer Watchdog Google antitrust panel hosted by John Simpson at the National Press Club (at 10:00 EST 4-21-10.) The panel features:

  • Gary Reback of the Open Book Alliance and Microsoft antitrust fame;
  • Simon Buckingham, a mobile advertising entrepreneur who believes Google-AdMob is anti-competitive; and
  • Joseph Bial, the Cadwalader, Wickersham and Taft counsel representing TradeComet and MyTriggers in two different private antitrust lawsuits against Google.

EU: What may be the most dangerous antitrust threat to Google may come from the recently announced EU preliminary inquiry into Google. It is likely to bloom into a broader formal investigation of Google because the EU has a much lower legal and policy threshold to bring an antitrust action than the U.S, and because the EU has never been shy about using its power to bring a dominant American firm to heel.

Three companies, the UK’s Foundem, France’s Ejustice.FR and Germany’s Ciao, have all alleged that Google punishes niche search competitors, by discriminating against them in Google’s search results and anti-competitively favoring Google-owned content with top search rankings.

Foundem’s filing to the FCC is the best source of evidence of Google’s anti-competitive behavior and it is compelling.

II. Privacy/Security

Now that it is public that Google’s vociferous indignance over China’s censorship of its search results was clever PR misdirection from the real story, that Google’s main password system was hacked and breached, Google now has an incalculable liability to all its users and business, government and foreign government customers whose personal information and secrets have been made available to who knows whom — and those users who have had no ability to protect themselves for the last few months since Google became aware of the breach.

As John Markoff of the New York Times reported:

“…the losses included one of Google’s crown jewels, a password system that controls access by millions of users worldwide to almost all of the company’s Web services, including e-mail and business applications.”

Google could be liable for the largest identity theft in history, and/or one of the largest corporate breaches ever. And Google does not believe it material for the CEO to disclose to shareholders in the quarterly call that covers it? This is precisely the type of new material adverse information that SEC rules mandate that shareholders be informed of so they can protect themselves. This extended lack of disclosure to people and businesses at risk is also an invitation for class action lawsuits by shareholders and users.

Google has particularly large liability here to its users because, as I have written extensively in my “security is Google’s Achilles heel” research series, security has not been, and is still not a high public corporate and engineering priority for Google. Moreover, Google’s “publicacy” business model means that Google has collected much more private information on users than most any of them appreciate. (See my House testimony on Google privacy weaknesses.)

Simply, Google has huge potential liability now because of Google’s longstanding low priority for security and Google’s anti-privacy “publicacy” business model characterized by CEO Schmidt’s cavalier statement on CNBC: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Google’s CEO also ducked disclosing the new massive liability and threat to Google’s international business, which represents 53% of Google’s revenues. The Washington Post lead story that Google was working with the National Security Agency (NSA) on the China cyaber-security issue will make foreign governments and foreigners much less comfortable using Google’s products and services going forward.

The liability for Google’s pervasive invasion of privacy norms around the world coupled with the news that Google is working with America’s top spy agency, means that nations around the world will be cracking down on Google more, or blocking their products, services and monetization more.

This backlash is not hypothetical. Google blogged today that: “Google products — from search and Blogger to YouTube and Google Docs — have been blocked in 25 of the 100 countries where we offer our services.”

Today a broad group of the data protection heads from many major countries have written an open letter to Google and other online companies asking that Google better safeguard private information. The countries included, Canada, France, Israel, Netherlands, Spain, Germany, Italy, Ireland, New Zealand and the UK.

Google’s privacy-security liability is real, material and growing/spreading fast. It is material and should be discussed in an open investor forum so shareholders can hear from Google the extent of Google’s liabilities. It will be interesting to what extent Google discloses these new exploding liabilities and risks to the SEC in their quarterly filings. (It should be of no surprise that the forensic accounting firm Audit Integrity characterizes Google’s accounting and governance as “very aggressive” and ranked in the top 3% for most risk.)

All these new privacy-security risks/liabilities are on top of the disastrous launch and consumer privacy breach of Google Buzz that prompted an EPIC privacy complaint to the FTC and embroiled Google’s former top lobbyist, Andrew Mclaughlin in a congressional oversight investigation for potentially deleting Presidential records.

The FTC’s potential mandate of new consumer privacy safeguards for behavioral advertising that could hem in Google’s very aggressive tracking of most all Internet users’ web behavior. (See Google’s reply to the FTC urging they go slow.)

The increasing potential for bipartisan comprehensive privacy legislation in the House that for the first time would give consumers more control over what private information Google could collect on them without their meaningful consent.

III. Intellectual Property

Viacom: Now that key documents have been made public in the Viacom vs. Google-YouTube copyright infringement trial, it is clear that Google has employed a deliberate business model/strategy to infringe copyrights to dominate traffic share.

Anyone that reads the key Google documents in the case will come away with the concern that Google has deep legal, monetary and brand liabilities for serially infringing copyright to grow its business to dominance. Read the quote summary first here, then review the copious evidence/history in the 86-page Viacom Statement of Facts here, then review Viacom’s Summary Judgement memo of law here, and finally see the several new Google documents here.

Google’s copyright infringement liablities will not end with Viacom. If Viacom prevails, which is likely, it will embolden all the other IP owners to redouble their efforts to gain restitution and a changed business model from Google. Those include, but are not limited to, news wires, newspapers, publishers, authors, songrwriters, studios, programmers, photographers, etc. (See Googleopoly IV at www.googleopoly.net)

Apple’s Trade Secrets Suit against HTC (Google):

Apple’s patent infringement suit against Google Nexus One manufacturer HTC, puts Google CEO Eric Schmidt, a former, long-time Apple Director, in potentially very hot water with Government officials. The suit looks like a very clever “carom shot” at Google CEO Schmidt as it allows Apple to legitimately discover CEO Schmidt’s emails involving any communication that Schmidt had with his mobile team concerning the development of Google’s Android operating system and Nexus One handset, especially after Schmidt returned from Apple board meetings. It is apparent that Apple believes that Google stole its intellectual property and trade secrets involving the iPhone and iPad, especially the multi-finger screen pinch control patent.

This is a serious liability for Google’s CEO. Mr. Schmidt had a fiduciary duty to Apple shareholders not to harm them by lifting trade secrets for Google’s and Mr. Schmidt’s financial benefit.

It also creates a strategic pincer situation/problem concerning Mr. Schmidt’s email practices. The Viacom case unearthed that Mr. Schmidt has a Quatrone-esque, “clean-up-those-emails” personal practice of deleting all his personal emails. This is particularly ironic and ineffective with a company that copies and stores most everything and deletes hardly nothing that it collects on people.

It is also a big red flag for any investigator, because it strongly suggests that one knows they have something to hide, encouraging the investigators to examine everyone else’s emails that communicated with Mr. Schmidt at those times. At a minimum, Mr. Schmidt’s email deletion practices preventing any discovery creates a serious perception problem for Google as it goes before multiple court and policy fora.

In sum, the litany of exploding major liabilities to Google’s business model, growth and value — from the slew of real and worsening antitrust, privacy-security, and intellectual property problems — are not going away.

These liabilities will increasingly overhang Google’s stock and brand, especially if Google continues to “turtle” and avoid public accountability to Google shareholders. Uncertainty and distrust are bad company attributes to allow to fester and grow. This past quarter certainly has been a fast start to “Google’s Liability Decade.”
_________________
Scott Cleland is one of nation’s foremost techcom analysts and experts at the nexus of: capital markets, public policy and techcom industry change. He is widely-respected in industry, government, media and capital markets as a forward thinker, free market proponent, and leading authority on the future of communications. Precursor LLC is an industry research and consulting firm, specializing in the techcom sector, whose mission is to help companies anticipate change for competitive advantage. Cleland is also Chairman of NetCompetition.org, a wholly-owned subsidiary of Precursor LLC and an e-forum on Net Neutrality funded by a wide range of broadband telecom, cable and wireless companies. He previously founded The Precursor Group Inc., which Institutional Investor magazine ranked as the #1 “Best Independent” research firm in communications for two years in a row. His latest op eds can be seen at www.precursorblog.com.

Fair Use: This site may contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. I am making such material available in my efforts to advance understanding of political, human rights, economic, democracy, and social justice issues, etc. I believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research, educational, or satirical purposes. If you wish to use copyrighted material from this site/blog for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.


Leave a Comment

If you would like to make a comment, please register to do so. I hate to do that but there are so many spam-bots out there that deleting spam comments would be a full time job if I were to just open it up for anyone without asking them to jump through a few hoops first.

You must be registered and logged in to post a comment. Anyone can register. No registrant's information is kept, used, or sold. CLICK HERE TO REGISTER

Social Networking


Help the Soldiers!



American Genius

Our Founding Ideas

"Governments are instituted among men,deriving their just powers from the consent of the governed." Declaration of Independence July 4, 1776





Enter your Email


Preview
Powered by FeedBlitz

Subscribe in a reader




Recently Written

  • Happy Easter 2014
  • Clinton Papers: Bill and Hillary Feared the Internet
  • ‘Star Trek Continues’ Righting a Start Trek Original Sin
  • Eric Khon Slams Rich Miller as Anti-Capitalist
  • Chicago Math: Three is Only Two
  • Eating Their Own: Union Wants to Unionize Extremist, Left-Wing Media Matters, Website Owners Furious
  • Fox News to Explore the Mysterious Disappearance of Jennifer Kesse
  • 2014 Illinois Tea Party Tax Day Tea Party Rally in St. Charles
  • Writer Huston: Long Road Ahead for GM, But Don’t Count It Out
  • POLICE STATE: Feds Still Buying Tons of Ammunition


  • What THEY Say:
    Foreign News In English




    Click HERE for information
    on my fedora collection.
    Antique Stetsons, hat history...



























    Contact Us

    Email Publius' Forum

    Archives

  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009
  • January 2009
  • December 2008
  • November 2008
  • October 2008
  • September 2008
  • August 2008
  • July 2008
  • June 2008
  • May 2008
  • April 2008
  • March 2008
  • February 2008
  • January 2008
  • December 2007
  • November 2007
  • October 2007
  • September 2007
  • August 2007
  • July 2007
  • June 2007
  • May 2007
  • April 2007
  • March 2007
  • February 2007
  • January 2007
  • December 2006
  • January 2006
  • December 2005
  • November 2005
  • October 2005
  • September 2005
  • August 2005
  • July 2005
  • June 2005
  • May 2005
  • April 2005
  • March 2005
  • February 2005
  • January 2005



  • Add to Technorati Favorites


    Clicky Web Analytics